Stricter criteria to be set for electricity retailers to guard against market volatility
Several electricity retailers exited the market within weeks last year, citing unfavourable market conditions.
SINGAPORE: The Energy Market Authority (EMA) will enhance regulatory requirements on electricity retailers to protect consumers amid market volatility, after several players called it quits late last year.
Potential retailers can only enter the market if they have sufficient financial strength and sustainable business plans to withstand some degree of market volatility, said the Ministry of Trade and Industry (MTI) in a press release on Tuesday (Oct 25).
"We also plan to impose higher capital/hedging requirements on retailers to ensure that they are sufficiently resilient against market volatility, and additional protections for consumers if retailers prematurely terminate contracts," the ministry added.
These are among the measures authorities will implement to ensure Singapore's energy security.
In his keynote address at the annual Singapore International Energy Week on Tuesday, Minister for Trade and Industry Gan Kim Yong said electricity prices rose multiple folds this year due to a “perfect storm” of fossil fuel shortages exacerbated by the Ukraine war, severe disruptions in renewable power as well as global oil and spot gas price spikes.
With Singapore importing almost all of its energy supply, its electricity market was “severely” tested as fuel prices surged, he said.
In the second half of last year, at least five electricity retailers exited the market within weeks, citing soaring wholesale electricity prices and unfavourable market conditions.
It came amid a global energy crunch, prompting EMA to take "extraordinary" steps last October to safeguard energy supplies, which include setting up standby fuel facilities for power generation companies (gencos) to draw upon to generate electricity if needed.
Authorities had also directed gencos to procure sufficient fuel to generate electricity based on their available generation capacity. These measures will be in place until the end of March 2023.
While the emergency measures helped to stabilise the market, Mr Gan stressed the need to strengthen Singapore’s energy market structure.
“This is unlikely to be the last energy crunch we will face. The global clean energy transition will also not be a plain-sailing one, and we can expect continued volatility going forward,” he said.
He added that EMA will also look into tightening the eligibility criteria for wholesale electricity price plans, so that only consumers who are able to deal with the risks of price volatilities would be allowed to buy these plans.
"All consumers can still enter into retail contracts, while consumers who qualify for the regulated tariffs can still continue to do so," he said.
ENSURING SECURITY OF GAS SUPPLIES
Singapore has a liberalised power sector where private generation companies procure fuel, generate electricity and sell to consumers, MTI said, noting that this competitive market structure has its limitations.
Although EMA sets the performance standards, it does not intervene in gas contracting, generation capacity planting and electricity pricing.
"While this competitive market structure has served us well over the past two decades – increased innovation and efficiencies in operations, and a wider range of retail options for consumers – some gaps have emerged," MTI said.
For instance, when gas prices are high, gencos are less inclined to contract for gas for fear that they would be left stranded when gas prices moderate.
"Without the assurance of back-to-back electricity contracts, gencos are also reluctant to enter into longer-term gas contracts which typically offer greater guarantee of delivery and lower prices," MTI noted.
To address this, EMA will institutionalise the measure requiring gencos to maintain sufficient fuel for power generation.
It will also work with the industry to explore ways to improve gas procurement, such as by collectively contracting for longer-term gas contracts for greater security of supply, or demand aggregation to provide economies of scale. EMA will also maintain the standby LNG facility to manage gas supply disruptions.
ENSURING SUFFICIENT POWER-GENERATING CAPACITY
To ensure sufficient generation capacity to meet system demand, a structured process will be introduced to facilitate private investments.
Currently, investments in new generation capacity are driven by each company’s commercial considerations.
Since it takes about four to five years to plant a new generation unit, there could be prolonged periods of over- and under-supply, leading to volatile electricity prices, said MTI.
To address this, EMA will conduct a competitive tender about five years in advance of the year in which the generation capacity is projected to be required. The most competitive proposal will be awarded a licence to build, own and operate the new capacity.
All new generation plantings will be coordinated to avoid risks of over- and under-capacity.
EMA will step in as a last resort if there is insufficient private sector interest to build new generation capacity.
"While these guardrails will, to some extent, reduce choice for market participants (gencos and retailers) and consumers, it will help to improve the stability and security of our power sector in the longer term and ensure that Singapore is well placed to navigate the energy transition," MTI said.
"We are mindful that these adjustments will reduce the flexibility of some market participants," said Mr Gan.
"Generation companies cannot plant new capacity as they wish. Consumers may have fewer retailers to choose from. Some may not be allowed to purchase electricity from the wholesale electricity market."
"However, these measures will bring about a stronger and more secure power system collectively," he said, adding that the Government will consult the industry and the public on the proposed changes.
This will be conducted by EMA over the next few months, with the measures to be rolled out progressively in 2023.